Fed Officials Saw Waning Gains From Bond Buying, Minutes Show

Ben S. Bernanke, chairman of the U.S. Federal Reserve, following a Federal Open Market Committee meeting in Washington, D.C., on Dec. 18, 2013. Photographer: Andrew Harrer/Bloomberg

Jan. 9 (Bloomberg) -- Federal Reserve officials saw
declining economic gains from the central bank’s asset purchases
and voiced concern about future risks to financial stability
during their last meeting, when they started tapering bond
buying.

“A majority of participants judged that the marginal
efficacy of purchases was likely declining as purchases
continue,” the record of the Federal Open Market Committee’s
Dec. 17-18 meeting showed. Participants also were “concerned
about the marginal cost of additional asset purchases arising
from risks to financial stability,” citing the potential for
“excessive risk-taking in the financial sector.”

Policy makers will gather Jan. 28-29 to consider the next
step in their strategy of gradually reducing the pace of bond
buying as the economy strengthens. The minutes didn’t describe a
set schedule for reductions, although “a few” officials
mentioned the need for a “more deterministic path.”

“A lot of people in the market think asset purchases have
had declining benefits over time, and this is the first time I
can recall the committee as a whole has really come out and
agreed with that sentiment,” said Michael Feroli, chief U.S.
economist at JPMorgan Chase & Co. in New York.

“The economy seems to be able to stand more on its own
now,” Feroli said.

Some Fed officials “expressed the view that the criterion
of substantial improvement in the outlook for the labor market
was likely to be met in the coming year if the economy evolved
as expected,” the minutes said.

‘Less Progress’

At the same time, “several” officials said “a range of
other indicators had shown less progress toward levels
consistent with a full recovery in the labor market, and that
the projected pickup in economic growth was not assured.”

The committee cut monthly purchases to $75 billion in
December, from $85 billion, citing improvement in the labor
market that pushed the jobless rate down to a five-year low of 7
percent.

The yield on the benchmark 10-year Treasury note rose 0.05
percentage point to 2.99 percent in New York, and the Standard &
Poor’s 500 Index was little changed at 1,837.49.

Recent progress on jobs, manufacturing and housing has
affirmed the FOMC’s view that the economy is improving enough to
take the first step toward exiting stimulus that has swelled the
Fed balance sheet to more than $4 trillion.

‘Measured Reduction’

Fed Chairman Ben S. Bernanke on Dec. 18 said the Fed will
“continue to do probably at each meeting a measured reduction”
in the pace of purchases. The FOMC will probably taper buying in
$10 billion increments over the next seven meetings before
ending them in December, according to a Dec. 19 Bloomberg News
survey of economists.

The minutes said “many participants expressed concern
about the deceleration in consumer prices over the past year.”
The personal consumption expenditures price index rose 0.9
percent for the 12 months ending November, more than a
percentage point below the Fed’s 2 percent target. Some
participants said inflation was unlikely to slow further.

The FOMC lowered its target interest rate to near zero in
December 2008 and says it will stay there as long as the
unemployment rate remains above 6.5 percent and the outlook for
inflation doesn’t exceed 2.5 percent.

The committee strengthened that pledge last month, saying
it “likely will be appropriate” to hold the main interest rate
near zero “well past the time that the unemployment rate
declines below 6.5 percent, especially if projected inflation
continues to run below the committee’s 2 percent longer-run
goal.”

‘Proceeded Smoothly’

Fed staff reported that tests of the reverse-repurchase
agreement mechanism had “proceeded smoothly,” and that the
program probably would be extended beyond January to gather more
information on demand for the facility and gauge its “efficacy
in putting a floor on money market rates,” according to the
minutes.

The Federal Reserve Bank of New York said last month it
increased how much money counterparties can post to the
repurchase mechanism to $3 billion from $1 billion. Under the
agreements, the Fed lends securities for a set period to
temporarily remove cash from the banking system.

Policy makers met in the final weeks of Bernanke’s eight-year tenure, which ends Jan. 31. Vice Chairman Janet Yellen, an
architect of the unprecedented easing, was confirmed this week
by the Senate to succeed Bernanke.

Rates Rose

Interest rates climbed after the Fed’s Dec. 18 tapering
announcement, with the yield on the 10-year Treasury note rising
to 3.03 percent on Dec. 31, a more than two-year high. The
average 30-year fixed-rate mortgage rose to 4.53 percent last
week from as low as 3.35 percent in May, according to Freddie
Mac data.

Officials discussed and rejected the idea of lowering the
unemployment threshold, opting instead to “provide qualitative
guidance regarding the committee’s likely behavior after a
threshold was crossed.”

Bernanke has said bond buying by the Fed helped bolster the
recovery, reducing unemployment in November to a five-year low
of 7 percent. Monetary stimulus last year helped push up the
Standard & Poor’s 500 Index 30 percent to a record 1,848.36 on
Dec. 31.

Bernanke said in a Jan. 3 speech that the country may be
poised for faster growth.

“The combination of financial healing, greater balance in
the housing market, less fiscal restraint, and, of course,
continued monetary policy accommodation bodes well for U.S.
economic growth in coming quarters,” he said in Philadelphia.

Recent economic reports have reinforced Bernanke’s outlook.

Companies added more workers than projected in December as
U.S. employers grew more optimistic about the prospects for
demand, a private report based on payrolls showed yesterday.

The 238,000 increase in employment was the biggest since
November 2012 and followed a revised 229,000 gain in November
that was stronger than initially estimated, according to the ADP
Research Institute in Roseland, New Jersey.